It remains likely that the only way for QE to work is if it makes people believe the central bank has lost its inflation-fighting credibility. And that hasn’t happened yet. Although the time is getting closer.

Last week, the Bank of England said it would be buying yet more U.K. government bonds from the market; its total QE is rising to £375 billion ($580 billion) from £325 billion. The European Central Bank is holding off from bond purchases because of political hurdles but another mechanism is being put into place for European QE-lite, while the Bank of Japan is working through a 10 trillion yen ($125 billion) program announced earlier this year, as part of what is looking like perpetual QE, according to a commentary by the Sober Look economics blog in March.

But the data show that successive rounds of heterodox monetary policy–like QE or Operation Twist or the ECB’s trillion-euro long-term repo operations–are having increasingly smaller and shorter impacts on market sentiment and, thus, on the underlying economies.

QE is meant to work by driving investors into riskier assets as central banks replace outstanding government bonds with cash and bank reserves that yield at most next to nothing. But holders of these other assets also know that while QE inflates their prices for now, any reversal of policy–once economies start to recover–runs the risk of sending the prices of those assets crashing back down to where they can be justified by long-term expectations, determined by official interest rates and risk premiums.

Two U.K. data releases Wednesday morning. On the face of it, two very different outcomes.

The British Bankers Association said net mortgage lending fell in May for the first time since records began in 1997, weighed down by weak confidence among banks, consumers and businesses amid the deepening euro zone crisis and difficulties in keeping U.K. government costs in check.

So, on the one hand consumers’ appetite to take on substantial and increasingly more expensive mortgage debt weakened, but their ability to spend on less expensive goods in order to celebrate over a four-day weekend rose.

But, on further inspection, the CBI figures were not as upbeat as you might expect.

Next week’s summit of European Union leaders will be vital for currencies other than just the euro.

Rising fears about global growth, tumbling commodity prices and a sharp pull-back from risky markets means that commodity and emerging market currencies are now coming under the cosh.

At the moment, downward pressure on these currencies is limited.

However, the sell-off will intensify if EU leaders fail to give international investors any hope that a longer-term solution to the euro-zone debt crisis is in the offing.

Focus on the Brussels summit has grown over the last week as the endless stream of short-term bailouts for either sovereign governments or banks has failed to underpin market confidence.

As a result, global growth has started to falter and the need for a successful solution to the debt crisis has become even more urgent.

International Monetary Fund chief Christine Lagarde drove the point home by calling on European leaders to accelerate moves towards complete monetary union to prevent the whole European monetary system from unravelling. Her call comes as economic data from around the globe suggests that growth is becoming increasingly elusive in most major economies.

As this bleak message on the world’s outlook spreads to commodity markets, prices have plummeted to their lowest level in about one and a half years. Crude oil in particular has fallen below $90 a barrel after trading up over $125 only back in April.

As central banks around the world line up to introduce more monetary easing, this is not the time to sell sterling. On the contrary, this could be the time to buy it.

The primary threat to the pound is a crisis that threatens the euro, not the efforts by monetary authorities to prevent that from happening.

As we have seen in the strength of the pound over the last few months, as long as the debt problems in the euro zone do not erupt into a full scale panic in financial markets, the pound attracts plenty of support.

The U.K. economy may be well exposed to the euro zone, but with the government remaining determined to pursue fiscal discipline, and with the Bank of England responding to the recent economic slowdown with more targeted credit lines to support banks and consumers, the U.K. should be in a better position to withstand a storm.

Moreover, minutes of the last Bank of England policy meeting show that board members were on the brink of voting in more quantitative easing now that U.K. inflation has fallen to 2.8%

The pound declined just after release of the minutes, indicating the initial, knee-jerk reaction from investors was to sell the currency because looser monetary policy should bring down interest rates, and with that, the yield differential for sterling assets compared with alternatives.

The gold market faces a testing few days. With Greek elections looming Sunday and the U.S. Federal Reserve’s policy-setting meeting starting just two days later, the precious metal has a chance to prove its worth as a safe haven after months of trading in line with risk assets such as equities and base metals.

For many market observers, gold’s behavior has been a little out of sorts lately. As fears of a global recession have mounted, investors have slimmed down their gold holdings in a bid to raise cash and cover losses elsewhere, increasing gold’s correlation to risk-related assets.

This, in turn, has made prospective buyers nervous of the yellow metal, and seen them seek security in other perceived stores of value such as the U.S. dollar instead.

In the recent “flight to quality..the yellow metal [has] been left out in the cold,” said UBS analyst Edel Tully in a recent report.

Last month, the gold price dropped 6.3% as investors gave the metal a wide berth amid mounting concern about Europe’s sovereign debt crisis.

However, gold has been showing flickers of its old self in recent weeks.

The debate about why the U.K. is having a worse recovery than the U.S. has offered up every possible cause except the most likely one.

Policy makers, parliamentarians and economists variously point to the government’s austerity program, insufficient monetary stimulus, a broken and beleaguered banking sector and the euro-zone crisis as reasons the U.K. has double-dipped after registering the most tepid of rebounds from the deepest downturn since the 1930s.

Thanks, of course, to the euro zone, we are now back in a binary investment world where everything stands or falls as either a haven or a risk play.

So, if there were a euro-less country with a top-notch credit rating, sound banks and a competent government, you’d expect its currency’s position on the board to be obvious, wouldn’t you? Safe haven, no two ways about it. But now look at the Swedish krona.

Its home boasts all those doughty haven attributes and more. Indeed, but for a rather patchy inflation-fighting record (nobody’s perfect, not even the Swedes), you might make the case that it should probably be the safest-rated currency of all. But no. The krona is actually a risk play.

Covering short euro positions now is one thing. Taking long positions in the single currency is entirely another.

It is why this little euro rally won’t last. The latest bout of short-covering is hardly surprising given the extreme level of speculative short positions, talk that Germany may yet allow Spain to get a soft bailout and signs that major central banks may start to ease policy again.

ABB Ltd., one of Europe’s largest engineering groups, is increasingly choosy about which European banks it entrusts with its money as fears grow about a Spanish banking collapse and Greece’s possible exit from the euro zone.

“We have treasury plans to deal with [the possible collapse of the euro], making sure our cash is in the proper places so we don’t get caught,” Chief Executive Joe Hogan said in a recent interview at the Swiss company’s headquarters in Switzerland’s financial capital.

“There are hot-spots and it is fair to say we are selective where we are putting our money. We are avoiding certain European banks,” Mr. Hogan added, without being more specific.

Another day, another measure showing deepening economic problems in the U.K..

The usually more resilient manufacturing purchasing managers index slumped to a three year low of 45.9 in May from 50.2 in April and way below the consensus forecast for 49.9.

The data show a collapse in orders and output as the ongoing euro zone debt crisis weighed heavily on sentiment and spending plans, while a sharp decline in domestic business exacerbated that weakness.

“It suggests that both the slowdown in global activity and uncertainty surrounding the euro area has had a significantly negative impact on sentiment and activity,” said Neville Hill, European economist at Credit Suisse.

Consumer and business confidence play a key part in spending plans and it would appear that confirmation of a return to recession in the U.K. as well as the increasingly possibility that the much talked about euro zone break-up could become a reality, have begun to take hold.